MEDICARE CHANGES TO HIT IN 2006?

Byline: Evan Pondel Staff Writer

Biotechnology companies and the patients who take their drugs have good reason to focus on the Medicare bill as federal reimbursement rates for such products are likely to change in 2006.

Three months after the new program takes effect, Medicare will roll out a $500 million demonstration project covering oral cancer drugs and self- injectable products that target rheumatoid arthritis and multiple sclerosis. Medicare has never covered these products, which leads to higher costs for patients and the hospitals that administer the drugs.

``We view the Medicare bill as a very good thing. It's something we've been pushing for a long time,'' said Kathy Stover, spokeswoman for the Biotechnology Industry Organization in Washington, D.C. ``The bill establishes lines in the sand as to what the reimbursements will be, as opposed to just coming out with these cuts.''

About a year ago, the Centers for Medicare and Medicaid Services cut reimbursement rates for many biotechnology drugs so dramatically that hospitals considered dropping the pricey treatments. In some cases, reimbursement rates were slashed as much as 35 percent, Stover said. Medicare also began dubbing certain drugs ``functionally equivalent'' to older products, nullifying any grounds for extra reimbursement.

Medicare said that Amgen's anemia drug Aranesp was functionally equivalent to Johnson and Johnson's older drug Procrit, and the reimbursement rates dropped. Since then, reimbursement for Aranesp has increased after Amgen argued that the drug should receive a reimbursement that is more in line with that of Procrit.

Assuming that the president signs the new bill, Medicare administrators will no longer characterize drugs as functionally equivalent, effective immediately, Stover said.

From the outpatients' perspective, Medicare will cover 88 percent of the average wholesale price for a biotechnology drug in 2004 and 83 percent of the price in 2005. But that doesn't quell concern for biotechnology investors.

The Medicare bill removes profit incentives currently in place to dose Aranesp's older EPO counterpart. The result, according to a recent report by S.G. Cowen, is that Medicare changes will ``have a negative impact on (Amgen's EPO) sales.''

The report said that EPO sales growth could slow from 5 percent annually to flat or ``even slightly down growth as dialysis providers adjust their usage habits.'' That would decrease Amgen's earnings per share by 5 cents to 10 cents in 2005 and beyond.

But not all analysts are concerned about Medicare's effects on Amgen's bottom line. ``I think it (the bill) will have a neutral effect on Aranesp sales. And most Aranesp sales happen in the doctor's office,'' said Dennis Harp, analyst with Deutsche Bank in New York.

Worldwide, Aranesp sales in the third quarter were $438 million versus $114 million in the third quarter of last year. The Thousand Oaks-based company said sales were primarily driven by an increase in demand.

'`There are lots of different areas within Medicare reform that could affect Amgen,'' said Michael Beckerich, spokesman for Thousand Oaks-based Amgen. ``Many things are still undefined in terms of EPO.''

The company expects combined sales of Epogen and newer generation Aranesp to range from $3.8 to $4 billion in 2003, compared with the previous range of $3.7 to $3.9 billion.

``In the short term, I think the Medicare bill is actually a positive for the biotechnology and pharmaceutical industries,'' said Sena Lund, analyst with Cathay Financial in New York. ``But the long term is still unknown.''

Some analysts expect the Medicare bill to be helpful for Amgen's anti-inflammation drug Enbrel and Cinacalcet, a drug that has yet to gain federal approval. Enbrel could certainly benefit from Medicare's $500 million demonstration project as the funds are intended for drugs that target rheumatoid arthritis. Cinacalcet would also likely receive reimbursement under the new Medicare bill, as it helps reduce bone loss in patients with kidney disease, Lund said.

Evan Pondel, [phone]

evan.pondel(at)dailynews.com